Revenue recognition detailed

Question 1

deferred credits

Answer 1

unearned revenue or deferred revenue

Question 2

royalty revenue

Answer 2

recognized when earned

think of it as A/R and U/R

J/E:
cash
unearned royalty

unearned royalty
royalty revenue

Question 3

Revenue recognition when the right of return exists

Answer 3

can return

revenue from a sales transaction where the buyer has the right to return the product shall be recognized when the sale is made if ALL the conditions are met:

a) sales price fixed at the date of sale
b) buyer assumes all risk of loss
c) buyer has paid some form of consideration
d) product sold is substantially complete
e) amount of future returns can be reasonably estimated

NOT a contingent sale

Question 4

Franchises

Answer 4

a) Initial franchise fees:
i) franchisor like mcdonals records revenue when work is substantially complete
ii) paid for services like site selection, supervision of construction, bookkeeping, and quality control
iii) recognized as unearned revenue till substantial work has been performed

b) Continuing franchise fees: revenues for services like management training, promotion, legal etc.
ii) Recorded when earned

Question 5

Substantial performance

Answer 5

when all the following conditions have been met:

1) franchisor has no obligation to refund any payment
2) initial services required of the franchisor have been performned
3) all other conditions of sale have been met

conditions of sale are not considered to be substantially performed till the FIRST DAY OF OPERATIONS, unless the franchisor can demonstrate otherwise